Balian is a blacksmith mourning his wife. He kills a corrupt priest and joins his father Barisan on the road to the Holy Land, where he inherits a title and lands. In Jerusalem, the leper king Baldwin IV keeps peace with Saladin while warmongers such as Guy de Lusignan push for conflict.
As the kingdom falls into the hands of the fanatics and war breaks out, Balian becomes the city's defender during Saladin's siege. The climax is not a heroic victory but a negotiated surrender. Balian gives up Jerusalem in exchange for the safety of its people. When he asks Saladin, "What is Jerusalem worth?", Saladin replies "Nothing," then turns back and adds "Everything!"
The hidden meaning becomes clear only at the end. The "kingdom of heaven" was never the city itself. Balian wins by saving lives rather than holding stones, and that confirms the film's claim that conscience matters more than territory or dogma.